Sure-Fire Recovery Stopper

Federal Reserve Chairman Alan Greenspan must feel vindicated. “A very strong recovery is underway,” he told Congress Wednesday. That makes this the shortest recession on record, and Greenspan deserves credit for getting his interest rate adjustments right. Unfortunately, the rebounding economy is threatened by President Bush’s planned budget deficits.

Despite Bush’s declaration at the White House that he will balance the budget by 2004, with vetoes if necessary, he is heading for a guns-and-butter spending spree reminiscent of the Vietnam era.

Counting on an expanding economy for new revenues is folly. As Greenspan correctly emphasized, it remains unclear how strongly the economy will grow, which is why the Federal Reserve is unlikely to raise interest rates at its May 9 meeting. American factories are still running at only about 75% of capacity, down 3% from even a year ago. Job growth last month was 58,000, still far below the 150,000 a month that is considered normal. A real surge in oil prices could send the economy back into recession.

What remains most worrying, however, is the Bush administration’s budget plan.

The president himself said the U.S. must not “repeat the mistakes in the ‘60s,” when spending on Vietnam was accompanied by domestic increases, not cutbacks. But the Bush deficits also have a third source: Government income will be restricted by massive tax cuts. According to the nonpartisan Congressional Budget Office, the Bush budget plan will be $262 billion in deficit until 2005. If tax cuts are made permanent instead of sunsetting in 2010, the Treasury will lose an additional $4 trillion over the following decade. Yet the administration seems not to be calculating the impact of all this red ink.

Health and Human Services Secretary Tommy G. Thompson admitted Wednesday before the House Ways and Means Committee, “In regards to tax policy, I have not considered that with regard to Medicare,” even though the tax-cut costs would in the end fall hardest on Social Security and Medicare.

President Bush’s spending may actually have helped pull the country out of recession in the short term, but it threatens to drag the economy back down at the very moment the baby-boom generation begins to retire. No amount of Federal Reserve wizardry can defeat Vietnam-era-style deficits.